Regulators eye tougher rules for buy-to-let borrowers

Mortgage lenders are battling to keep control of the buy-to-let mortgage market. Find out more.

Mortgage lenders are embroiled in a battle to keep control of the lucrative buy-to-let mortgage market which has now opened on two fronts.

The Council of Mortgage Lenders (CML), the industry trade body, has already launched a code of best practice backed by more than 30 lenders responsible for 90% of the market which has advanced 2.5
million buy-to-let loans worth £303 million in the past 16 years.

Now, the Bank of England’s financial policy committee has concerns about the number of interest-only buy-to-let mortgages granted by lenders.

The committee has requested The Treasury consults over giving the committee powers of direction so lenders can be ordered to cap loan-to-values and debt-to-income ratios for buy-to-let mortgages.

The committee already has similar powers for monitoring and controlling the residential mortgage market.

Quirky market

Britain has a quirky buy-to-let mortgage market. This type of mortgage is viewed as business lending, so stands outside stern regulation faced by residential mortgage lenders.

After years of arguing behind the scenes, the CML persuaded the government and European Union lawmakers that lenders could police the market and the Mortgage Credit Directive that comes into force next year did not need to include landlords. However,
The Treasury wasn't convinced and at the last minute introduced regulations to cover a new class of property investor – the consumer landlord. These landlords will have their buy-to-let borrowing curtailed by stricter rules.

A consumer landlord is typically someone who is renting out a home they formerly lived in. These landlords will have to prove mortgage affordability like ordinary homeowners, whereas professional landlords only have to show the rent received for
a home covers the mortgage payment plus 25%.

Why is this important?

The directive distinguishes between landlords running a business and those letting because they cannot sell their home – consumer landlords.

Last year, Countrywide, one of the country’s largest letting agents revealed 93% of landlords own a single letting property – and that property accounts
for 80% of all buy-to-let stock in the UK. The figures were based on researching the firm’s database of 65,000 landlords across the UK.

In addition, just 0.7% of landlords own more than five rental properties, which amounts to just 6.7% of rented homes across the country.

The regulators in Britain and Europe worry the buy-to-let market could overheat, taking Britain into another property bubble like that which led to a collapse in house prices in 2008, and that not having hands-on control of a significant section of the
market is too much of an economic risk.